ENERGY SHOCK: A time bomb is ticking

“In our view, the supply problems in the global crude oil market are deep and widespread, as evidenced in the contin­ued production outages in the North Sea, and will resurface again once the refinery maintenance season is concluded,” say analysts at Merrill Lynch. “Moreover, the weaker macro backdrop is putting further unconventional easing measures on both sides of the Atlantic back on the table. Per­haps more importantly, emerging markets are getting ready to ease monetary policy again as output and inflation are slowing. In our view, Brent crude oil prices will start to find support at the current levels.”

According to Moody’s, high crude oil prices tend to have a negative effect on refining and marketing companies. If high crude oil prices occur down the line, then there’s the risk of demand destruction for gasoline, distillates and other refined prod­ucts. Not to mention the fact that refineries and marketing companies face their own issues. “The higher the price of crude, the more working capital the R&M company needs to acquire and hold crude – and for most lower-rated R&M companies, high­er letters-of-credit needs as well,” says Moody’s. “This can have negative impli­cations for financial covenants and liquid­ity: An R&M company’s higher outlay for working capital can eventually pressure a refiner’s leverage and the availability un­der its bank credit facilities.”

There’s also a difference between light and heavy crude oil when high prices oc­cur in times of an energy crisis. According to Moody’s, the price differential actually tends to give a better advantage to those refiners who have made the effort to build more complex and advanced refineries that allow them to deal with all types of oil. “High crude prices bode well for increased production of heavier oil. But when refiners increase their production from more com­plex units, the demand for heavier crudes increases, and eventually the differential weakens,” Moody’s says.

There are silver linings in some of these storm clouds, however. One bright note is Libya. Yes, Libya. Without its longtime dicta­tor around, the North African nation is ramp­ing up its oil production to pre-war levels. There’s also hope, however small, that the world energy markets might see the departure of another despot, Venezuela’s Hugo Chavez For the rest of 2012, global oil demand growth should stand at some 0.9 percent, according to National Bank of Kuwait se­nior economist Daniel Kaye. The recent price declines, he says, have been driven by fears over potential turbulence in the global economy. Such fears are led by worries over the future of Europe’s single currency.